The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.

Millennials

I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.

 

People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.

Comment

If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.

 

 

Advertisements

22 thoughts on “The pensions dilemma for millennials and UK Retail Sales

  1. I just love the way the sky was going to fall in if pensioners had to suffer a double lock pension, so the “Land Rigging Party” caved in.and swipe a years worth of pension (more to follow) with seemingly no debate whatsoever.

    Still they can find best part of £30 billion a year for Housing Benefit which benefits the laziest, parasitic and most unproductive in society at the expense of workers having cheap housing so they can put money away in a private pension .. which in turn gets invested in productive companies which creates better jobs so the economy can grow without the need for an economy reliant on debt fuelled housing bubble growth and so on ……

    Read on a website that not long ago Britain was an aspirational society but now its a case of an increasing amount just surviving which seems more true by the day … and the latter won’t make very good consumers (or workers).

    • Hi Arthur

      What the pension system badly needs is some stability but what it continually gets is major changes to both the state and private systems. A decade or so ago I did the advanced insurance industry exam for pensions and in very short order it was out of date! That pattern has continued since and as you say many of the changes are knee-jerk as opposed to something helping people to plan for periods in the decades.

      • The pensions of the future seems to be the least offensive and most profitable money tree to shake.

        Means putting away an extra £300-400 Per Annum … a similar amount to the winter fuel bribe thats now here to stay.

      • Hi Shaun,
        I remember pouring quite a bit of my income into something called “graduated pensions” during my 20s – for very little benefit 40 years later.

  2. Here let me correct that for you

    they can find best part of £30 billion a year for Housing Benefit
    which benefits the laziest, parasitic and most unproductive in society

    – British Companies and Agri business

    so they can put money away in a private pension with a rate of return of -3%

    .. which in turn gets invested in productive companies abroad,
    creates better jobs abroad so the their economy can grow without
    the need pay taxes which leaves the UK reliant on a debt fuelled housing bubble growth and so on ……

    oh and whilst they’re at it, save the TBTF Banks

    – there much more like reality

    Forbin

  3. and , and your last paragraph

    Read on a website that not long ago Britain was an aspirational society

    yup always aspiring , never getting there , roll on the National Lottery!!

    but now its a case of an increasing amount just surviving which seems more true by the day … and the latter won’t make very good consumers (or workers).

    we know thats the plan – ref Dune or Homeworld , but thats the future for most Western economies

    forbin

    • Hi Forbin

      I have been reading the Foundation ( by Isaac Asimov) saga again recently and have read the one with Gaia. Our current situation could not be much more different to a planet where every part is alive and votes on things could it?

  4. Shaun, Your reminder really is depressing. I dont know why the young people dont go on strike? As you emphasise, following 3 years of education when they start out with conservatively £30k of debt, average starting salaries are probably £23k. House prices at £260k and pensions at 18%. I mean theres little to celebrate for them.. is there?

  5. ‘You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?’

    All younger generations are being shafted.Taxes,pensions,house prices high,stocks high,real wages declining…………………

    I really do wonder what the BoJ are drinking when they start buying ETF’s?Where will it end?

    • Hi Dutch

      Some of the board members of the Bank of Japan seem to be starting to think along those lines.

      ” Mr. T. Sato dissented, considering that ETF purchases of about 6 trillion yen annually would be excessive in light of their adverse impact on the pricing mechanism in the stock market and the Bank’s financial soundness. Mr. T. Kiuchi proposed that the Bank use amounts of asset purchases as its operating targets and set the guidelines for asset purchases as follows: the Bank would purchase JGBs so that their amount outstanding would increase at an annual pace of about 45 trillion yen, purchase ETFs so that their amount outstanding would increase at an annual pace of about 1 trillion yen, and so on.”

      I like the “and so on…” but more seriously it is underplayed how big a deal it is that there are dissenters at the BoJ with the face culture that exists in Japan.

  6. The basic state pension to me reminds me of the mirage of the oasis in the desert, that as you get closer just seems to keep moving further away.

    Let’s face it, these pushbacks in retirement ages are going to keep being announced, and eventually it will be means tested, “…. I notice from our records that you have a company pension Mr Paidinallhislifeforwhat, under the new rules we will now make your company pension of £140 per week up to the state basic pension of £150. Our monthly paymnent to you after 40 years of paying in tax and national insurance will be £10.

    Thankyou for pointing out that Mr Neverworkedadayinhislife amd MrEconomicmigrant will be entitled to the full state pension, but as you will no doubt be aware, the pensions are calculated on need not lifetime contributions.

    • Kevin,
      This already the current position. NIC contributions are just a form of general taxation, there is no “fund” from which to draw your pension.
      You cannot live now on the basic state pension and it is topped up by housing benefit, council tax relief etc., which are of course means tested.
      If there is any state pension, when you retire, it will have to be paid from general taxation as it is now.
      As to how much and when that will depend on the amount of money the government of the day has available.
      Do not believe anything a politician tells you about how much money you will get in 20-30 years time. The politician is just after your vote now, and will not be trying to get elected, when the promise is due to be redeemed. The same problem of predicting the future applies, of course, to everybody.
      But there is one current fact that you might bear in mind, is that as people live longer the cost goes up; or the age has to change.
      My prediction for the future (for what it is worth) is that the current politicians are underestimating the age at which pension payments will be affordable!

    • Isn’t “MrEconomicmigrant” and “Mr Paidinallhislifeforwhat” one in the same person? Why do you make the differentiation?

  7. Hi Shaun,
    I don’t know if I’m mistaken here but you sound positively alarmed at recent events and sounding a warning, all in your own very measured way of course. You discussed the costs of HS2 a couple of days ago and today vital electrification work on local lines is cut, good investment crowded out? The financialisation of our economy has to be reversed somehow.

    • Hi bill

      I heard that railway story earlier too ( for those that did not electrification work in Wales and ironically in some of the Northern Powerhouse has been scrapped). We are in a phase where a lot of bad decisions are being made…


  8. “…where are the potential future gains for the young in buying stock and bond markets at all time highs?”

    Anywhere and everywhere if you focus on P?E ratios and dividends. All time highs do not mean that markets must crash just as there is no time limit on a bull run. If fundamentals remain sound in terms of dividend and P?E millenials will obtain future gains from stocks and bonds.

    ” the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.”

    In fact consumption is based on ever rising housing prices as those who already own their houses gain more confidence from the increased value and either spend ore of their income and save less or take out loans against their homes and spend the money. Balance of payments has been “poor” since the early 80’s but the UK carried on growing, the re balancer being investment flowes that no one is interested in as it doesn’t fit with preconceived theories that negative balance of trade = armageddon regardless of any other foreign inflows and outflows.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s